Two associates using DatasiteOne on a laptop

Merrill Corporation

Blog

M&A in CEE: Riding the Wave

By Suzy Bibko, Content Marketing Manager, EMEA

M&A deals in CEE have risen to a total deal value of €4.2bn in Q4, a 51.2% rise from Q3 (€2.8bn) (Mergermarket), despite the overall number of deals dropping (Q4: 107; Q3: 123). In other words, fewer deals but with bigger price tags. What’s behind this wave, and will it be an endless summer of deals in the region? Merrill Corporation and Deloitte explored these questions at their recent Vienna conference (Insights Into the CEE M&A and Private Equity Market, 14 March 2019), and their insights are set out below.

Mixed bar chart of with line graph of CEE M&A quarterly breakdown from 2013-2018: deal count forming a dip then slight inverted parabola and deal value growth with a dip in 2014 and 2017

Mergermarket, EMEA Trend Summary Q1-Q4 2018

A High Water Mark

Overall, it seems that the CEE deal wave has not yet crested. Experts are optimistic that the CEE deal market is robust. Klaus Imhof, Managing Director and Head of M&A at Raiffeisen says, “We can’t see any kind of downturn now. Our pipeline is healthy. And western markets are looking at neighbouring markets like Vienna and pushing for deals and leads.”

This conclusion reflects the recent outlook for the region from Wolf Theiss and Mergermarket (Corporate Monitor FY 2018), which found that the Czech Republic, Poland Austria and Hungary are top deal spots. The region has evolved into an advanced and sophisticated market. Most CEE countries have recovered from the global economic crisis (2008) and are attractive to investors due to their low costs, skilled labour forces and location.

Optimism prevails despite persistent political problems in the region. In the Wolf Theiss and Mergermarket survey, 59% of respondents say the political environment in CEE had a negative impact, with 30% saying it had a significantly negative impact. However, businesses and growth in the region have apparently not been severely affected. Indeed, 99% of the survey respondents say that past experiences of doing business in the region would encourage them to invest there again. And many countries are either existing or aspiring EU members, offering access to EU markets and at least the appearance of stability on the surface.

Beware the Riptide

However, experts advise appropriate caution. “Almost any deal that I work on would have some political connotations,” says Martin Schwedler, Managing Partner at Arcus Advisors. “You have to choose very cleverly where you can have value add, where you can make a deal come through. And you have to choose your client. I would not go into a buy-side in Ukraine or Russia with someone who’s never done a deal there. But there’s always a way if you know the markets and players.”

Stepan Karpukhim, Managing Director of TRG, agrees: “We are investors in the region and our job is to navigate this region. Every country has its own peculiarities, difficulties, complexities, and our job is to understand each individual deal, the regulatory environment and risks, macro environments and risk, political and societal situations. And our job is to explain to our investors how it works in this environment. We have a spectrum of countries that are more comfortable and less comfortable for investment. CEE from a private equity viewpoint is a very healthy region.”

Imhof says that they know which sectors are the sensitive ones and they always carefully consider whether they should go for the transaction or not. “We would rather not do a deal in a certain sector where we’re not comfortable and where we know there is certain political exposure that could potentially harm our reputation.”

And while it’s important to identify these issues, you also need to minimise risks during the deal process. “That’s where having innovative technology comes in,” says Markus Schiller, Head of DACH and CEE at Merrill Corporation. “We’re solving those problems in the due diligence process by providing practitioners with an integrated technology solution that enhances security, improves efficiency and reduces total deal cost in resources and time.”

The Big Kahunas

Of course, the market has its share of big kahunas: local oligarchs can be extremely influential and there is an abundance of risk-taking entrepreneurs in the region. Andrei Krikliwy, Managing Director of SEAF explains, “The influence of local oligarchs, or local businessmen, is definitely on the rise throughout the region. It’s a natural progression. It’s difficult to compete against them. They are very well connected, fairly well capitalised, have good connections to banks and politicians. And are very flexible on deal structures.” And those entrepreneurs are coming of age and ready to sell up, cash out and move on to the next big thing. So, what do you do? Some prefer not to compete. But others are willing to catch the wave and hang ten. Remember, says Schwedler, “there are windows of opportunity in CEE and when you see them you have to grab them.” Cowabunga, dudes.